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Clustered OnTap complexities clobber NetApp

NetApp’s earnings report today disappointed investors as the vendor missed its previous revenue forecast, and it issued lower than expected guidance for this quarter. NetApp today also revealed plans to slash around 500 employees.

NetApp’s revenue of $1.54 billion for last quarter came in below its previous guidance range. Both its quarterly revenues and $6.12 billion revenue for its fiscal 2015 year that ended last quarter were down year-over-year.

For this quarter, NetApp forecasted revenue of $1.27 billion to $1.375 billion compared to consensus Wall Street expectation of $1.46 billion.

“We are not pleased with our results,” is how NetApp CEO Tom Georgens opened the earnings call with analysts.

The problem, according to Georgens, is that customers were waiting for Clustered Data OnTap to reach feature parity with legacy the legacy Data OnTap operating system. That happened when Clustered DataOnTap 8.3 became available in late 2014. But upgrading is a complex process, so large customers have held off and channel partners who have not invested in sufficient Clustered OnTrap training have held back smaller customers.

Georgens said waiting for Clustered Data OnTap to catch up with Data OnTap has hurt the vendor’s ability to attract new customers. It has also hurt sales of NetApp FAS arrays to existing customers who are holding on to old systems until they are ready to upgrade to Clustered OnTap.

“It is clear that we underestimated the impact that the transition to Clustered OnTap has had on our pipeline,” Georgens said. “Clustered OnTap is a re-architected and modernized version of OnTap. Customers have to upgrade existing storage management policies an migrate their data. Many large installed customers have resisted upgrading until feature parity was achieved with Data OnTap. The inhibitors to upgrade have now been mitigated with 8.3, and our largest customers see a path to upgrade to Clustered OnTap.”

The problem won’t go away so soon. NetApp’s poor guidance reflects that. Georgens said NetApp will beef up its sales force and its work with the channel to prepare to upgrade customers. But he said the next two quarters will be rough during a transition period. Georgens and CFO Nick Noviello said they expect NetApp to return to normal growth in the second half of its fiscal 2016 year.

NetApp today notified employees that it will lay off approximately 500 employees, and confirmed those plans in an SEC filing. The NetApp execs didn’t mention it on the call, but perhaps that is what Noviello was referring to when he talked about “a disruption related to re-tooling aspects of our business in the first half of [fiscal year] 2016.”

He didn’t explain how the layoffs might affect plans to increase the NetApp sales force.

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